China&#8217;s June manufacturing PMI beats estimate

The official manufacturing PMI for June indicates that growth in manufacturing activities continued to slow.

The headline PMI for June was 50.2, down from 50.4 in May, but above consensus estimate of 49.9. Although the headline number is better than expected, individual components are pointing to weaker activities than the headline figure suggests. New orders dropped to 49.2 in June from 49.8 in the previous month, while new export orders fell from 50.4 to 47.5, indicating very weak external demand.

Meanwhile, inventory for finished goods climbed slightly to 52.3. The resulting new orders less inventory measure was -3.1, fell from -2.4 in the previous month. Also, employment fell below 50 again to 49.7 after bouncing above 50 for three months, while input price fell from 44.8 to 41.2, showing the increasing deflationary pressure.

Although somewhat better than expected, we are getting increasing cautious in trying to interpret this number. We have mentioned the strong seasonality of the official PMI data. The chart below shows the headline PMI figures of each year. As you can see, the drop in this year's June figure appears to be less than in previous years.

This could be a sign of stabilisation, as the official press statement says. However, there are obvious inconsistencies within the current release to be considered. First of all, even though the headline number has fallen less than seasonality suggests it should, weaknesses are obvious in various components. New export orders, for instance, look particularly weak:

Source: China Federation of Logistics & Purchasing

While new orders and new orders minus inventory measure continued to weaken, although the degree of weakening for new orders is less significant than exports.

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Source: China Federation of Logistics & Purchasing

Also, the fall in input prices has been dramatic. At 41.2, this is the lowest reading since January 2009 at the height of the financial crisis. While the easing of inflationary pressure is a welcomed sign for many who are hoping for monetary easing, we take this as evidence that China is on track towards a debt deflationary outcome, which could be hard to reflate.

Finally, we are very doubtful if the headline PMI is a real sign of stabilisation because of the divergence of the official PMI figures with HSBC/Markit PMI. The chart below shows that while the gap between the two has closed in recent two months, it remains significant. And so far, the HSBC/Markit PMI has been much closer to the reality than the official PMI.